Small business tax tips – Filing T2125 form

If you have a small business in Canada or you are self-employed, then you need to keep in mind that filing taxes for you can be slightly different as compared to your friends who are employees.

The tax filing deadline for self-employed individuals and small business owners is June 15. If this is your initial year of filing taxes as a self-employed individual, the prospect of completing the T2125 form (Statement of Business or Professional Activities) might appear intimidating. Let’s start by understanding what is T2125 form and what is its importance while you are filing your taxes.

T2125 form for self-employed

The T2125 form is a tax form used in Canada for reporting business income and expenses for individuals who are self-employed or operate an unincorporated business. It is also known as the "Statement of Business or Professional Activities." The T2125 form is part of the individual's personal income tax return, which is filed with the Canada Revenue Agency (CRA).

On the T2125 form, individuals are required to provide detailed information about their business activities, including –

• Business Name: If applicable, the legal name of the business
• Business Address: The address where the business operates
• Business Type: The nature of the business (e.g., sole proprietorship, partnership, self-employed, etc.)
• Fiscal Period: The tax year for which the form is being filed
• Income and Expenses: Details of business income and expenses, including gross revenue, cost of goods sold, operating expenses, and various deductions related to the business
• Net Income: Calculations to determine the net income or loss from the business
• Capital Cost Allowance (CCA): Information about depreciable assets used in the business and the related CCA deductions
• Other Information: Additional information related to the business, such as whether it was a part-time or full-time venture and if there were any significant changes during the tax year.

The T2125 form is a crucial component of an individual's tax return if they are self-employed or operate an unincorporated business. It helps determine the taxable income associated with their business activities and ensures compliance with Canadian tax laws. It is important to keep accurate records of business income and expenses to complete this form accurately.

Filing T2125 form

The process of filling out a T2125 can be made more manageable by following these three straightforward steps.

1.  Identification

It has two parts.

Part 1 – In the first section of T2125 form you need to provide basic information about your business like your name, business name, address etc. Go through the above section to know what all details you need to provide.

Part 2 – If your business generates income from websites or web pages, please specify these sites/pages in the section labeled "Internet Business Activities," which is located immediately below the identification section.

2. Income section

Part 3

The income section of your tax return can vary in complexity depending on the nature of your business. For instance, if you provide a service like landscaping, the process can be relatively straightforward. You simply enter the total earnings you received from your clients. However, if you collected GST/HST, it's crucial to complete the designated sections to ensure proper accounting for these taxes.

The complexity of the income section can increase based on various factors. Here's a breakdown of the different parts involved –

• Part 3A: Business Income (excluding professional income)

In this section, you report income derived from your business activities, excluding income related to professions like dentistry or accounting. It's where you document earnings from services such as landscaping.

• Part 3B: Professional Income

Part 3B is specifically for professionals like dentists, accountants, or other professional practitioners. If your business falls into this category, you would use this section to detail the income generated by your professional practice, such as a dental clinic or an accounting firm.

• Part 3C: Gross Business or Professional Income

This part involves calculating the adjusted gross income that will be reported on specific lines of your tax return, such as line 13499, line 13699, or line 13899. It's essential for determining your overall taxable income accurately.

• Part 3D: Cost of Goods and Gross Profit

In this section, you calculate your gross business profit by subtracting certain costs, such as direct wages, opening inventories, and purchases, from your gross income. This step helps you arrive at the net profit figure that's essential for tax reporting.

3. Expenses

The expenses section of the T2125 form comprises several components, each addressing different aspects of your business expenditures. While some expenses like advertising, wages, and insurance are straightforward and require simple data entry, others involve more intricate calculations. Here's an overview of the various parts and their respective functions –

• Part 4: Income Loss Before Adjustments

Starting from the gross income detailed in Part 3C, this section allows you to deduct your business expenses, including items like advertising, meals, bad debts, and utilities. This step helps determine your income or loss before further adjustments.

• Part 5: Calculate Your Net Income or Loss

Following the deductions made in Part 4, this part is where you calculate your final net income or loss, providing a clear picture of your financial performance.

• Part 6: Other Deductions from Your Partnership

If there are any deductions from your partnership that were not reimbursed to you, they are recorded in this section.

• Part 7: Business Use of Home - Expenses

For those who operated primarily from a home office, this section involves calculating the percentage of your home's space used for income-generating activities and claiming relevant home-related expenses accordingly.

• Part 8: Partner Information

This part requires you to list the names and addresses of your partners, along with their respective share percentages in the business.

• Part 9: Details of Your Business Equity

Here, you provide specifics about your business equity, including capital assets and property holdings.

• Area A: Capital Cost Allowance (CCA)

This area pertains to the depreciation of depreciable properties. It involves calculating the CCA for these properties based on their class.

• Area B: New Capital Property Additions

You list any newly acquired capital properties in this section.

• Area C: New Building Additions

For additional buildings, you document them in this part.

• Area D: Equipment Disposed Of

If you disposed of equipment during the tax year, those details are noted here.

• Area E: Building Disposition

Details regarding the disposition of buildings (excluding land) are recorded in this area.

• Area F: Land Disposition

In this section, you document any dispositions related to land.

• Chart A: Motor Vehicle Expenses (Owned or Leased)

For vehicles used in your business, you calculate the business-use percentage and deduct related expenses accordingly.

• Chart B: Interest on Passenger Vehicle

This chart is used to calculate the interest paid on passenger vehicles.

• Chart C: Eligible Leasing Costs for Passenger Vehicles

If you are leasing a vehicle rather than owning, this chart allows you to deduct your leasing costs, up to a maximum amount, instead of calculating the CCA.

Navigating these sections accurately is essential for comprehensive expense reporting and proper tax compliance.

Frequently Asked Questions (FAQs)

1. What should partnerships be aware of?

Every partner must individually fill out a T2125 Form. When entering into a business partnership, it's crucial to ensure that all terms and conditions are meticulously documented. This documentation should encompass aspects such as ownership percentages, salary distribution, decision-making protocols, and the business's overarching objectives.

2. I work under a contract so am I am employee or self-employed?

If your contract stipulates that the payer dictates your tasks, you are classified as an employee. Conversely, if you retain control over your work, the services you offer, and your pricing structure, you fall into the category of being self-employed.